GLOSSARY
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Additionality
An impact arising from an intervention is additional if it would
not have occurred in the absence of the intervention.
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Adverse
Selection When asymmetric information
restricts the quality of the good traded. This typically happens
because the person with more information is able to negotiate a
favourable exchange.
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Affordability
An assessment of whether proposals can
be paid for in terms of cashflows and resource costs.
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Appraisal
The process of defining objectives, examining options and weighing
up the costs benefits, risks and uncertainties of those options
before a decision is made.
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Assessment(s)
Either an appraisal or an evaluation (or both).
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Base
Case The best estimate of how much a
proposal will cost in economic terms, including an allowance for
risk and optimism.
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Choice
modelling This term encompasses a
range of stated preference techniques and includes choice experiments
(often preferred because of its firm base in welfare economics),
contingent ranking, contingent rating and paired comparisons.
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Contingent
valuation This involves directly asking people how much
they would be willing to pay for a good or service, or how much
they are willing to accept to give it up.
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Contingency
An allowance of cash or resources to cover unforeseen circumstances.
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Cost
Benefit Analysis Analysis which quantifies
in monetary terms as many of the costs and benefits of a proposal
as feasible, including items for which the market does not provide
a satisfactory measure of economic value.
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Cost-Effectiveness
Analysis Analysis that compares the costs of alternative
ways of producing the same or similar outputs.
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Cost
of capital The cost of raising funds
(expressed as an annual percentage rate).
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Cost
of variability in outcomes This is the
most a person is willing to pay to have a benefit that is certain,
rather than one that is uncertain.
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Crowding
out The extent to which an increase
in demand occasioned by government policy is offset by a decrease
in private sector demand.
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Deadweight
Expenditure to promote a desired activity that would in fact have
occurred without the expenditure.
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Diminishing
marginal utility The tendency
as extra units of any commodity or service are used up or ‘consumed’,
for the satisfaction provided by those extra units to decline.
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Discounting
A method used to convert future costs or benefits to present values
using a discount rate.
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Discounted
Cash Flow (DCF) A technique
for appraising investments. It reflects the principle that the value
to an investor (whether an individual or a firm) of a sum of money
depends on when it is received.
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Discount
rate The annual percentage rate
at which the present value of a future pound, or other unit of account,
is assumed to fall away through time.
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Displacement
The degree to which an increase in productive capacity promoted
by government policy is offset by reductions in productive capacity
elsewhere.
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Do
minimum option An option
where government takes the minimum amount of action necessary.
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Economic
cost (or opportunity cost) The
value of the most valuable of alternative uses.
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Economic
Efficiency This is achieved when
nobody can be made better off without someone else being made
worse off.
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Effectiveness
A measure of the extent to which a project, programme or policy
achieves its objectives.
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Evaluation
Retrospective analysis of a project, programme, or policy to assess
how successful or otherwise it has been, and what lessons can be
learnt for the future. The terms ‘policy evaluation’
and ‘post-project evaluation’ are often used to describe
evaluation in those two areas.
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Existence
value The value placed by
people on the continued existence of an asset for the benefit of
present or future generations.The latter is sometimes referred to
as bequest value. See also Use value.
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Expected
value The weighted average
of all possible values of a variable, where the weights are the
probabilities.
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Externality
costs or benefits
The non-market impacts of an intervention or activity which are
not borne by those who generate them.
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GDP
deflator An index of the general
price level in the economy as a whole, measured by the ratio of
gross domestic product (GDP) in nominal (i.e. cash) terms to GDP
at constant prices.
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Hedonic
pricing Deriving values by
decomposing market prices into their constituent characteristics.
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Information
asymmetry Differences in information
held by parties to a transaction where this information is relevant
to determining an efficient contract or a fair price or for monitoring
or rewarding performance.
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Impact
statement A description,
quantified where possible, of all the significant impacts of a proposal,
and of how they are distributed between those affected.
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Implementation
The activities required during the period after appraisal to put
in place a policy, or complete a programme or project, at which
point ‘normal’ service is achieved.
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Internal
rate of return (IRR) The discount
rate that would give a project a present value of zero.
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Irreversibility
This applies when an option would rule out later investment opportunities,
or would use resources now that might subsequently be preferred
for a more important later use.
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Market
failure An imperfection in
the market mechanism that prevents the achievement of economic efficiency.
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Market
value The price at which a commodity
can be bought or sold, determined through the interaction of buyers
and sellers in a market.
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Marginal
utility The increase in satisfaction
gained by a consumer from a small increase in the consumption of
a good or service.
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Monte
Carlo analysis A technique
that allows assessment of the consequences of simultaneous uncertainty
about key inputs, taking account of correlations between these inputs.
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Moral
Hazard An example of information
asymmetry where a contract or relationship places incentives upon
one party to take (or not take) unobservable steps which are prejudicial
to another party.
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Multi
Criteria Analysis See Weighting and Scoring
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Net
Present Value (NPV) The discounted value
of a stream of either future costs or benefits. The term Net Present
Value (NPV) is used to describe the difference between the present
value of a stream of costs and a stream of benefits.
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Opportunity
cost (or Economic cost) The
value of the most valuable of alternative uses.
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Optimism
bias The demonstrated systematic
tendency for appraisers to be over-optimistic about key project
parameters, including capital costs, operating costs, works duration
and benefits delivery.
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Option
appraisal The appraisal of
various options chosen to achieve specific objectives.
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Option
value The value of the availability
of the option of using an environmental or other asset (which in
this context is usually non-marketed) at some future date. See also
Use value.
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PFI
Private Finance Initiative
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PPP
Public Private Partnership
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Precautionary
principle The concept
that precautionary action can be taken to mitigate a perceived risk.
Action may be justified even if the probability of that risk occurring
is small, because the outcome might be very adverse.
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Present
Value The future value expressed
in present terms by means of discounting
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Price
index A measure of the amount
by which prices change over time. General price indexes cover a
wide range of prices and include the GDP deflator and the Retail
Price Index (RPI). Special price indices apply to one commodity
or type of commodity.
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Proposal
An idea for a policy, programme or project that is under appraisal.
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Public
Sector Comparator
Public Sector Comparator is a hypothetical risk-adjusted costing,
by the public sector as a supplier, to an output specification produced
as part of a PFI procurement exercise. It:
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is
expressed in net present value terms; |
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is
based on the recent actual public sector method of providing
that defined output (including any reasonably foreseeable
efficiencies the public sector could make); and, |
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takes
full account of the risks which would be encountered by that
style of procurement. |
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Pure
time preference Pure
time preference is the preference for consumption now, rather
than later.
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Real
option theory This presumes
that decision making is sequential and that decision makers may
benefit from choosing options that may seem sub optimal today
but which increase flexibility at later times, leading to better
decision making when more is known about the project.
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Real
price The nominal (i.e. cash) price
deflated by a general price index, e.g. RPI or GDP deflator, relative
to a specified base year or base date.
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Real
terms The value of expenditure
at a specified general price level: that is a cash price or expenditure
divided by a general price index.
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Relative
price effect The movement over
time of a specific price index (such as construction prices) relative
to a general price index (such as the GDP deflator).
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Relevant
cost/benefit All costs
and benefits that can be affected by decisions and that are therefore
related to the objectives and scope of the proposal in hand.
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Required
rate of return A target average
rate of return for a public sector trading body, usually expressed,
for central government bodies, as a return on the current cost value
of total capital employed.
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Resources/
resource cost Terms used in
a variety of senses, according to context. In resource accounting,
‘resource costs’ are accruals accounting costs expressed
in real terms. In economic analysis a distinction is sometimes drawn
between ‘transfers’, such as social security payments
and ‘resource costs’ which are payments for goods or
services. In departments and agencies ‘resources’ is
a term sometimes used to describe expenditure from their budgets,
or sometimes requirements of staffing.
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Revealed
preference The inference
of willingness to pay for something which is non-marketed by examining
consumer behaviour in a similar or related market.
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Risk
The likelihood, measured by its probability, that a particular event
will occur.
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Risk
register / log A useful tool
to identify, quantify and value the extent of risk and uncertainty
relating to a proposal.
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Sensitivity
analysis Analysis of
the effects on an appraisal of varying the projected values of important
variables.
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Shadow
price The opportunity cost
to society of participating in some form of economic activity.
It is applied in circumstances where actual prices cannot be charged,
or where prices do not reflect the true scarcity value of a good.
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Social
Benefit The total increase
in the welfare of society from an economic action - the sum of the
benefit to the agent performing the action plus the benefit accruing
to society as a result of the action.
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Social Cost The total cost to
society of an economic activity - the sum of the opportunity costs
of the resources used by the agent carrying out the activity, plus
any additional costs imposed on society from the activity.
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Stated
preference Willingness to
pay for something that is non-marketed, as derived from people’s
responses to questions about preferences for various combinations
of situations and/ or controlled discussion groups.
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Substitution
The situation in which a firm substitutes one activity for a similar
activity (such as recruiting a different job applicant) to take
advantage of government assistance.
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Switching
point or switching value The
value of an uncertain cost or benefit at which the best way to proceed
would switch, for example from approving to not approving a project,
or from including or excluding some extra expenditure to preserve
some environmental benefit.
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Systematic
risk Risk which is correlated
with movements in the economic cycle and cannot therefore be diversified
away.
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Time
preference rate Preference
for consumption (or other costs or benefits) sooner rather than
later, expressed as an annual percentage rate.
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Total
Economic Value The sum
of the use, option and existence value of a good: a term used primarily
in environmental economics.
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Transfer
payment A transfer payment
is one for which no good or service is obtained in return.
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Uncertainty
The condition in which the number of possible outcomes is greater
than the number of actual outcomes and it is impossible to attach
probabilities to each possible outcome.
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Use
value Value of something which is
non-marketed provided by people’s actual use of it. See also
Existence value and Option value.
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Weighting
and Scoring An technique that
involves assigning weights to criteria, and then scoring options
in terms of how well they perform against those weighted criteria. Weighted
scores are then summed, and can then be used to rank options.
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Willingness
to Accept The amount that someone
is willing to receive or accept to give up a good or service.
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Willingness
to Pay The amount that
someone is willing to give up or pay to acquire a good or service.
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